A Guide to Crypto Staking and Proof of Stake Coins (POS)
The crypto market is growing fast — which means more mining, more transactions and record levels of energy consumption by cryptocurrencies.
In response to the growing potential for environmental impact of the crypto space, developers are increasingly looking to new blockchain protocols — like Proof-of-Stake (PoS) — as alternatives to the more conventional but energy-intensive Proof-of-Work (PoW) protocol.
The new protocol, if adopted by major coins, could have a serious impact on the crypto space.
Drawbacks of the Proof-of-Work (or POW) Protocol
The conventional proof-of-work protocol for the Bitcoin blockchain uses “work” to verify new blocks on the blockchain — or a set of records of new bitcoin transactions that happened over a set time period.
Proof of work requires nodes on a network to prove that they’ve expended enough work — or computational power — to validate new transactions.
This work is mostly arbitrary — randomly engaging in hash functions until the node or computer arrives at a correct answer — but ensures that a decentralized network of users can arrive at a consensus for a new transaction.
To incentivize users on the network to perform this work, nodes that successfully verify a new block, called miners, are compensated with block rewards in the form of bitcoin.
The decentralization of transaction verification is one of the key benefits of blockchain technology, along with
The advantage of this approach is that fraud is extremely difficult — because each new entry to the blockchain requires verification, a single actor will likely not be able to manipulate the blockchain without serious investment of resources.
Attacks on the blockchain are possible, but for the most part proof-of-work is an effective deterrent against malicious or unauthorized edits to the blockchain.
The disadvantage of this approach is primarily its inefficiency. As the blockchain grows, so does the work necessary to verify each new block. More work means more computational power and more energy, which is how a single bitcoin transaction can require a little more than 1,750 kilowatt-hours (kWh) of power.
The Energy-Saving Potential of Proof of Stake (POS)
An estimated 39% of the energy powering crypto is renewable. This means that existing crypto energy consumption relies heavily on non-renewable resources — and also that the crypto space is demanding more and more renewable energy that could be used to help decrease reliance on fossil fuels.
The growing energy consumption of cryptocurrency is one of the biggest challenges that the crypto space faces, along with growing regulatory pressure from institutions like the IRS, which has been plagued by a shrinking workforce and limited budget.
The proof-of-stake approach is an alternative protocol that’s becoming more popular because of how little energy it uses compared to the proof-of-work protocol.
With proof of stake, the blockchain uses staking, rather than work, to validate new transactions.
Like proof of work, new blocks are verified by users competing to be the first to solve complex hash-based tasks that require significant investment of computational power.
Unlike proof of work, however, there are barriers to who can verify new blocks. If users want to participate in the verification of a new block, they have to put up some amount of cryptocurrency to do so. This is called “staking.”
Because participation requires an investment of both resources and currency, fewer users will participate, reducing the energy spent verifying each transaction.
The user that submits a valid answer and verifies a block receives a reward, as with the Proof of Work protocol.
In some cases, if a user behaves maliciously or tries to manipulate block verification, they can lose their stake.
The approach gives more power to individuals, but theoretically disincentives an attack by those individuals — the more stake a miner has in the network, the less of a reason they have to attack it.
How Proof of Stake May Influence the Crypto Landscape
If widely adopted, proof of stake could help to make the crypto space much greener — ensuring that, even as it grows rapidly, developers can minimize the potential environmental impact of blockchain technology.
The developers of Ethereum, the second-largest cryptocurrency by market capitalization, estimate that adopting the PoS protocol could slash the coin’s energy consumption by as much as 99%.
This would mean that changes to the Ethereum blockchain would be much cheaper — down from the current estimate of 129 kWh for a transaction to around 1.29 kWh, about the energy cost of 100 VISA transactions.
Phase 1 of Ethereum 2.0, which introduced staking to the currency, launched on December 1, 2020. The next phases of the rollout, which will make the currency usable, are set to happen some time in the near future.
A number of other smaller coins, including Cardano, Polkadot and NEO, already use the POS protocol. Adoption by both new currencies and major crypto projects like Ethereum could help ensure the crypto space remains sustainable over the coming years.